iiNet, M2 considered merger in face of impending NBN

iiNet
and
M2 Telecommunications
engaged in serious merger talks last year as part of an audacious plan to create a new, multibillion-dollar force in the broadband market, ahead of the arrival of the NBN.

The two second-tier telecommunications providers, whose financial profiles are remarkably similar, explored a “merger of equals", under which a newly listed entity would be created to acquire both companies, without paying a premium to shareholders.

A takeover of M2 by iiNet was also given some consideration, but the reverse was ruled out, because of the presence of
TPG Telecom
on iiNet’s share register, with a 7.25 per cent blocking stake. The merger talks were ultimately shelved.

It is understood the discussions, which took place in late 2012, were led by
Goldman Sachs
, which advised M2 Telecommunications on its recent $230 million purchase of
Eftel
and
Dodo
and its $192.4 million purchase of
Primus
last year. However, at least one other investment bank, believed to be
UBS
, is understood to have pitched the idea to both companies.

iiNet chief executive
Michael Malone
and M2 Telecommunications executive chairman
Vaughan Bowen
are considered friends in the close-knit telecommunications industry. The two entrepreneurs are of a similar age and their careers have followed similarly meteoric trajectories.

Both companies have been enthusiastic participants in the consolidation that has swept through the sector in recent years, in anticipation of the levelled playing field of the NBN. iiNet most recently bought
Internode
for $105 million in late 2011.

A combination of the two companies would benefit from increased scale and would carry strategic rationale: iiNet has historically focused mainly on the consumer market, while M2’s domain has traditionally been among SMEs.

Sources said that a lack of obvious ­synergies was one reason why the talks were abandoned. However, they said strategic discussions could be revisited if M2 shows progress on the integration of its recent acquisitions, or if a valuation gap between the two companies share prices emerges.

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Company Profile

iiNet stock has almost doubled over the past 12 months, pushing its market capitalisation up to $951 million, at Friday’s closing price of $5.90.

M2 Telecommunications market value stood at $855 million as of Friday’s close, after a 55 per cent rise in its share price over the past year.

Citi analyst
Justin Diddams
expects iiNet, Australia’s third largest provider of DSL broadband, with 837,000 subscribers, to generate earnings before interest and taxes of $104.5 million this financial year, on revenues of $945 million.
Eley Griffiths
portfolio manager
Brian Eley
, a long-time shareholder in iiNet, said the company faces a crossroads with an NBN now confirmed under either political party.

“It needs to reinvent itself again," he said. “One way or another we are going to have some kind of NBN and that is a threat and an opportunity for them. In an NBN world, everyone is going to be up for grabs."